UK Construction Adjudication- A meaningless remedy against a recalcitrant party ?
The Latham report is repeated, embossed and permeated throughout construction law textbooks. With it came to bear the new statutory regime for adjudication under the UK Housing Grants, Construction and Regeneration Act 1996.
It brought into effect a statutory scheme for payment liabilities, right to suspend work and to go to adjudication for non-payment for contractors. Unfortunately, the adjudication system has not achieved the desired result for the contractors that are most susceptible to cash flow variations caused by late payments.
The system should, for the most part, have deferred payment in favour of the contractor to fulfil the statutory purpose of the adjudication scheme. Instead, excessively formalistic approaches to the construction of payless notices and interim payment applications, applying legal construction techniques, have created an unnecessary amount of case law.
The case of Caledonian Modular Ltd v. Mar City Developments Ltd  EWHC 1855 (TCC) provides a classic example of this over complication of adjudication. Here the court was asked to review the validity of an interim application for payment and, as a consequence, whether a failure to apply a pay less notice to it would result in consequential payment for the sum claimed in the contractor’s application. The adjudicator’s decision was overruled by a relatively complicated application of the law on the interpretation of contracts. One might feel that this is an unfair burden to place on adjudicators, many of whom who are not practising lawyers. This approach also opens up adjudication decisions to further unnecessary challenges.
The court’s decision went against the contractor, as Coulson J (as he then was) felt that the adjudicator was wrong to decide that the interim payment application was a valid one. This decision was deductive in nature, based principally on two key factors. The first was that the interim payment application was not made on the regular period of time when such applications were made. Secondly on the face of the application document there could not have been an application for payment.
The latter was for two subsidiary reasons relating to the construction of the document. The payment application document seemed to be a slight variation of a previous application (to which there had been a payless notice). Conversely, the amount claim had been very similar to another, subsequent, payment application, to which there was a payless notice. This reasoning of the court stands to be a little forced, without taking the point as a clear estoppel. The acceptance of a later payless notice technically should not, necessarily, cancel out a failure to issue a payless notice previously so that the previous failure can amount to a basis for enforcement of an application for payment.
A better approach would have been to conceptually separate the construction of the document as an application to pay from the issue of whether such a payless notice ought to have been given. The latter is a failure to meet a statutory requirement rather than issue of construction per se. They are two distinct issues.
To clarify this point: a failure to make a pay less notice, or an issue concerning whether one has been made out of time, should not be a factor in the determination of whether an application to pay itself had been made. The latter is the contractor’s intention to be paid and cannot be subject to evidence of whether a statutory pay less notice is later applied.
The key concern of the court was that small variations on consecutive applications of payments after a payless notice is issued on one might make the employer out of time on a mere technicality concerning time frames.
In this case it was noted by the court that the issue of the application for payment was not consistent with the normal timeframe when such applications were to be made thus the court found that there was no intent to make an application for payment on the construction of that document. It is worth taking the logic of this point further.
Ordinarily where the contractor seeks to be paid, and has made an application to pay that is in accordance with the frequency of when such applications are made – the issue of a later payless notice being issued, to the same unpaid sum on an inappropriately timed application, should have no bearing on the previous application where there was a failure to deduct by way of a payless notice. Otherwise the cash-flow problem caused to the contractor for the previous non-payment would simply be compounded by retrospectively making right an omission, or a purported omission, for a deduction by the employer. This is, of course, a reversal of the facts in Caledonian for the purposes of illustrating this point.
Overall, Coulson J was correct to overturn the adjudicator’s decision on the basis of the inappropriateness of the timing of the application for payment. He is right to be concerned that this could, otherwise, lead to sneaky out of time and irregular applications for payment to defeat the right to a payless notice.
The case, however, raises a broader issue as to the viability of the adjudication system. It allows a cross-application by an employer who has lost a payment dispute before an adjudicator. This is a far bigger problem and issue. As Coulson J noted [see para 13 of Caldeonian] where an adjudicator has awarded a payment, it is usually subject to a summary judgment application in the courts if not adhered to by the losing party. Coulson J said that this was the orthodox position in 99% of cases he had seen (and he is, undisputedly, the judicial expert in this field). It is indeed rare for an adjudication decision to be challenged on the same basis as the arguments brought forward before an adjudicator.
The decision of Bouyges, concerning the viability of an outstanding payment in insolvency, makes this clear. However, as Coulson J (as he then was) states: there is the scope of an exception to this supposed finality in determining a minor point of law or technical construction of a document through a Part 8 claim (a claim where there is no significant dispute of fact).
So where does this narrowing of the field leave the losing party who wishes to circumvent the adjudicator’s decision? Well it is relatively easy to undermine the purpose of the regime by a cross-claim by way of arbitration or litigation due to the lack of legal finality given to an adjudication decision by the 1996 statute. This might increase the amount of cases that form the exception that Coulson J had to deal with.
The mischievous employer could still, (akin to what was tried in Caledonian), make a strategic Part 8 application on a technicality to potentially derail a finding of payment by an adjudicator. This may slow down the payment process than that ordinarily available on summary judgment in the court, for example, so as to cause a contractor severe cash flow difficulties, particularly in relation to the common problem of keeping sub-contractors and suppliers content. Unpaid suppliers and sub-contractors, who may have formed good relationships with the main contractors, might then be less willing to walk the tight rope on payment on other projects. This may undermine the working apparatus of the decent hard working contractor.
This leaves what was one area of finality in the adjudication process potentially exploitable to calculated claims on the construction of interim payment applications and payment notices to delay payment. That was precisely what the designers of the adjudication system did not want.
With many contractors having only a small allocation of sums for legal fees and having not being paid compounding the cash impact of fighting disputes, it may be better to simply move to the arbitration option in the construction contract from the very start of the contracting process. That would be, arguably better, than being in the 1% of cases where the Part 8 process is used to derail the positive decision of the adjudicator that payment is due.